What You Need to Know About Electricity Prices

We constantly hear that Australia’s paying too much for power, but what does that really mean? And where does that cost come from?

Turning on our lights and powering our lives is a wonderful thing. Getting our electricity bills generally is not. The way we pay for our power is complex, and without a clear picture of our supply system, it’s hard to understand the alternatives.

The electricity supply chain

Three groups of companies are involved in getting electricity to your house:

1. Generator companies: These companies own generation assets that create electricity from sunlight, wind, water, coal, and gas
2. Transmission and distribution companies: Once the power has been generated, it needs to get to where it’s needed. The transmission and distribution companies own the poles and wires that connect generators to your house. They are also the ones responsible for connecting your home to power.
3. Retailers: Electricity retailers, or the people you pay, don’t actually control any of the physical aspects of electricity. Instead, they are responsible for collecting the money from end users (you) and paying the generators and transmission companies

Where do the prices come from?

Each of these groups want a slice of your bill.

The transmission and distribution slice is the easiest to understand. We only have one set of poles and wires in each region, so they have a local monopoly, and their charges are set by regulators every year. They pass the same costs onto each customer.

The generators are slightly more complicated. Once a generator produces electricity and pours it into the grid, it’s impossible to tell where it came from. You can’t directly say where the electricity that made your toast came from, and so the retailers and generators can't trade electricity directly. Instead, all electricity is traded on one big central market, the wholesale market, which is managed by Australian Energy Market Operator (AEMO).

Demand and supply for electricity in the grid must always be perfectly in balance (or we’d have a blackout), and so AEMO sets a wholesale price for electricity every 30 minutes to ensure that supply is equal to the demand.

AEMO sets this price based on ‘bids’ from generators. Each generator bids in the minimum price they would need to be paid to generate electricity for the next half hour,¹ and then AEMO picks the lowest price that will give sufficient supply to meet demand. All the generators who agree to generate in this period get that price for the power they produce. And all the retailers are then responsible for paying that price for whatever their customers consume.

What about traditional retailers?

You might be wondering how your electricity retailer manages to give you a fixed price for electricity when wholesale prices are always changing.

Well, retailers traditionally forecast what they think will happen to wholesale prices, then purchase financial ‘hedges’ to protect them against these movements. This is a kind of insurance, but it means that retailers have to pay a premium to be able to get a hedge. Some retailers try and reduce this premium by buying generation assets, which means they essentially negotiate with themselves to buy a ‘hedge’.

The final chunk of your bills goes to the retailers themselves. Oh, and when you buy from a retailer, you’re also paying for the costs associated with their business.

But things are changing

Renewable electricity is massively changing the economics of electricity in the wholesale market. Renewable sources can be expensive to build (although that’s dropped a lot in recent years), but once built they cost very little to run. This means renewable generators are always ‘bidding’ into the wholesale market at extremely low prices, think $0 or even less. But renewable sources are also intermittent, they can often only run when the wind is blowing or the sun is shining. This means wholesale prices are getting more volatile. They can be super cheap when renewables are in action, but more expensive when we have to rely on dirty fuels.

This is making it harder for retailers to predict future prices. The price that retailers are charging for retail electricity is getting much higher than wholesale costs. So, if you can access the wholesale market, you’ll be getting cheaper electricity. And, spoiler alert, that’s where we come in.

How you can save with amber

At Amber, the only way we make money is from the subscription fee our members pay.

Our model also gives you the flexibility to time your electricity usage. Save your big electricity loads for times when renewables are pushing down prices or even get paid when prices go negative. So if you need to charge an electric car or heat hot water, it’s time to get strategic. And the best part is that when you choose to use power at renewable times, you’re using less coal-generated power, which is better for all of us.

1) Actually this process is done every 5 minutes, with AEMO setting a 'settlement price' every 30 minutes based on the average of all these 5 minutes periods. But that's a subject for a whole new post!